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BBA 4 Indian Legal System For Business
BBA 4 Indian Legal System For Business
BBA 4 Indian Legal System For Business
SYLLABUS
Class: - B.B.A. IV Semester
Subject: - Indian Legal System for Business
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B.B.A. 4th Sem. Subject- Indian Legal System for Business
UNIT-I
THE INDIAN CONTRACT ACT 1872
The law of contract in India contained in Indian Contract Act 1872, which is based on English common
Law. It extends to whole of India except the state of Jammu and Kashmir. It came into force on the first
sep., 1872. The Act lays down general principles governing all contracts, but not the rights and duties of
the parties. The rights and duties are decided by the parties themselves.
Scheme of the Act – The scheme can be divided into two main groups –
1. General principles of the law of contract. (Section 1-75)
2. Specific kinds of contracts viz. (section 124-238)
a. Indemnity and Guarantee
b. Contracts of Bailment and Pledge
c. Contract of Agency.
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6. Lawful object – For the formation of a valid contract, it is also necessary that the parties to an
agreement must agree for a lawful object. The object must not be fraud or illegal or immoral or
must not imply injury to the person or property of other.
7. Writing and Registration – Generally the contracts may be oral or written. But in special cases, it
lays down that the agreement must be in writing or registered to be valid.
8. Certainty – an agreement can be enforced, if its meaning is certain or capable of being made
certain, agreements the meaning of which is not certain are void.
9. Possibility of performance – the terms of the agreement must also be capable of performance
physically as well as legally.
10. Not expressly declared void – the agreement must not have been expressly declared void under
the act. There are some types of agreements which have been expressly declared to be void.
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6. Transfer of The party obtaining goods under The party obtaining goods under voidable
title void agreement cannot transfer a agreement can transfer a good title to the
good title to the third party third party if the third party obtains it in
good faith and for consideration and the
aggrieved party has not avoided the contract
before such transfer.
7. Restitution Parties do not have right to restore Generally, right restitution is available if the
the benefits passed on to the other party elects to avoid the contract.
unless the parties were unaware of
the impossibility of performance at
the time of arrangement or the
party to the agreement was minor.
8. Damages No party as a right to get If a party rightfully rescinds (i.e. puts and
compensation for damages because end) the contract, he can claim
such agreement has no legal effect. compensation, he can claim compensation of
damages sustained by him due to non-
fulfillment of the promise.
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Performance contract
Two parties enter into a legal contract with a view to fulfilling objectives in the form of reciprocal
promise. After the formation of a contract, the next normal step in the contractual course is the doing of
the piece of work which has been promise to do by each party.
In other words, the parties have to perform their respective legal obligation arising out of the contract.
According to section 37 of the contract act prescribes that “The parties to a contract must either perform
or offer to perform their respective promises, unless such performance is dispensed with or excused
under the provision of this act or of any other law”.
Non performance will amount to a breach of contract if the performance is dispensed with or excused its
legal consequence is a discharge from the obligations.
Types of performance
1. Actual performance – When a party to a contract has done, what he had under taken to do their
remains nothing to be done by him, the promise is said to have been actually performed by him
and the liability to such party comes to an end.
2. Attempted performance or tender – When the performance becomes due and the promisor
offers to perform his obligation under the contract at the proper time, place and in the proper
manner, but the promisee does not accept or refuses to accept the performance such attempt
made by the promisor is known as ‘Attempted Performance ‘or Tender’.
Kinds of Tender –
a. Tender of goods or services
b. Tender of money
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Performance of Joint Promises – When two or more persons enter into a contract with one or more
persons. The promises under such a contract are known joint promises; the conditions regarding the
performance of joint promises may be discussed as follows –
1. Devolution (passing or transfer) of joint liabilities (section-42)
2. Any one from the joint promisor may be compelled to perform (section-43)
3. Right and liabilities of joint promisors, among themselves (Section-43)
4. Release of a joint promisor and its effect (Section-44)
5. Devolution of joint rights
Performance of reciprocal promises – “Promises which form the consideration or part of the
consideration for each other are called reciprocal promises.”
Kinds of reciprocal promises and the relevant rules regarding their performance may be discussed as
follows–
1. Mutual and concurrent promises (section 51)
2. Mutual and independent promises (section 51)
3. Mutual dependent promises (Section 51)
4. Order of performance of reciprocal promises (Section 52) – These promises are to be performed
is expressly fixed by the contract and it must be performed in that order.
5. Effects of preventing a party from performance of his promise (section 53) – the contract
becomes voidable at the option of the party so prevented is entitled to compensation from the
preventing party for any loss which he may sustain as a result of the non-performance of his
promise.
6. Effect of default in relation to that promise which of should be performed first (Section-54) –
Where the nature of reciprocal promises is such that one of them cannot be performed till the
other party has performed his promise then if the other party fails to perform it, he cannot claim
the performance of the reciprocal promise from the first party.
7. Reciprocal promise to do thing legal and also other thing illegal (Section-57) – The first set of
promises is a contract but the second is a void agreement.
8. Promises in which one branch is legal and the other illegal (Section 57) – The legal branch alone
can be enforced by law.
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5. Performance of the Promise where the manner and time is prescribed in such cases the
performance of promise must be made in the prescribed manner and at the prescribed time
(Section 50)
Performance where time is an Essential factor (time as the essence of contract) – when time as the
essence of contract means that the time is an essential factor and therefore the concerned parties must
perform their promises within the specified time.
Time is generally considered to be the essence of the contract in the following cases –
1. Where the parties have expressly agreed to treat the time as the essence of the contract
2. Where the delay in performing the promise operates as an injury to the party.
3. Where the nature and the necessity of the contract requires the time to the essence of the
contract.
(According to section-55)
A. Effect of failure to performance within fixed time where time is the essence of the contract than
the contract becomes voidable at the option of the Promisee.
B. Effect of failure to perform within fixed time where time is not the essence of the contract than
the contract does not become voidable however, the promisee is entitled to compensation from
the promisor for any loss suffered by him due to such failure.
C. Effect of acceptance of performance at a time other than that agreed and resulting the contract
become voidable however if he opts to accept the performance after the agreed time he cannot
claim compensation for any loss suffered by him due to the non performance of the promise at
the agreed time.
Appropriation of payments:
Appropriation of a payment means setting a part of payment for a specific use.
1. Application of payment where the debt to be discharged is indicated or instruction is given then
the payment is to be applied to the discharge of some particulars debt (section-59).
2. Application of payment where the debt to be discharged is not dictated then the payment is
applied according to creditor’s discretion to any lawful debt actually due and payable to him from
the debtor the amount may be applied to a dept which has become time barred (section-60)
3. Application of payment where neither the debtor nor the creditor makes any appropriation then
the Payment shall be applied in discharge of the debts in 'order of time, whether they barred or
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not barred by the existing law of limitation, if debts are of equal standing (of the same date) the
payment shall be applied in discharge of each proportionately.
When the rights and obligations arising out of a contract are extinguished, the contract is said to be
discharged or terminated. A contract may be discharged by any of the following ways –
1. By performance – Actual or Attempted
2. By mutual consent or arrangement
3. By subsequent or supervening impossibility or illegality
4. By lapse of time
5. By operation of law
6. By breach of contract
A. Discharge by Performance – Performance of a contract is the most popular manner of discharge of
a contract. The performance may be either Actual performance of attempted performance.
1. Actual Performance – When each party fulfils his obligations arising out of the contract within
the time and in a manner prescribed, it is called the actual performance and the contract comes
to an end.
2. Attempted performance or Tender – When the promisor offers to perform his obligation, but
is unable to do so because the promisee does not accept the performance, it is called” Attempted
performance” or “tender”. Thus tender is not actual performance but is only an offer to perform
the obligation under the contract. A valid tender of performance is equivalent to performance.
Effect of refusal to accept a valid tender – The effect of refusal to accept a properly made “offer of
performance” is that the contract is deemed to have been performed by the promisor. And the promise
can be sued for breach of contract. Thus we can say that “a valid tender discharges the contract.”
B. Discharge By Mutual Consent or Agreement – A contract is created by means of an agreement, it
may also be discharged by another agreement between the same parties.
1. Novation – “Novation occurs when a new contract is substituted for an existing contract, either
between the same parties or different parties, the consideration mutually being the discharge of
the old contract.” If the parties are same, then small changes in the terms of contract are called
“alteration” and not “Novation”. For being “Novation”, the changes must be of significant nature.
Novation cannot be compulsory; it can only with the mutual consent of all the parties.
2. Alteration – It means that change of one or more of the material terms of a contract. A material
alteration is one which alters the legal effect of the contract e.g. change in the amount of money,
change in the rate of interest etc.
Note that a material contract made in a contract by one party without the consent of the other
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will make the whole contract void and no person can maintain alteration upon it.
3. Rescission – A Contract may be discharged before the date of performance, by agreement
between the parties to the effect that it shall no longer bind them. Such an agreement amounts to
"Rescission” or cancellation of the contract, the consideration being the abandonment by the
respective parties of their rights under the contract. Example A promises to deliver Some goods to
B on say 14th Nov. 2006. But before the date of performance i.e. 14th Nov. 2006, A and B mutually
agree that the contract will not be performed. The contract stand discharged by rescission.
Note – in rescission, the existing contract is cancelled by mutual consent without substituting a
new contract in its place.
4. Remission – It is defined as "Acceptance of Lesser amount than what was contracted for or it
lesser fulfillment of the premise made"
5. Waiver – It means deliberate giving up of a right which a party is entitled to under a contract
where upon the other party to the contract is released from his obligation. Example a Promise to
stitch a shirt for B if B sings a song in A’s party and accepting if B sings a song in A’s party. Then
later on B says there is no need to stitch shirt for me to which A gives his consent. Thus the
contract is terminated.
C. Discharge By Subsequent or Supervening Impossibility or Illegality – Impossibility at the time
of contract. If you contract for something impossible the agreement is void ab initio the promisee
knows about the impossibility after using reasonable efforts the promisor is bound to compensate
the promise for any loss he may suffer because of non performance of the promise, even if the
agreement being void ab initio.
Subsequent impossibility is found out after the contract is made, “A contract to do an act which after
making the contract, become impossible or unlawful, becomes void when the act becomes
impossible or unlawful.”
Conditions for It…
1. The act should have become impossible.
2. The impossibility should be by reason of some event which the promisor could not prevent.
3. The impossibility should not be self induced by the promisor or due to negligence.
To be impossible, it is sufficient that it becomes impracticable or extremely hazardous or unless from
the point of view of the object and purpose which the parties had in view,
If the performance of a contract becomes impossible by reason of supervening imposition or
illegality of the act it’s logical to absolve the parties from further performance of it as they never did
promise to perform impossibility.
D. Discharge by Lapse of time – In some circumstances, the lapse of time may also discharge a
contract, e.g. the period of limitation for simple contracts is three years under the limitation Act and
therefore on default by a debtor, if the creditor does not file a suit for a recovery against him within
three years of default the debt becomes time barred and the creditor will not get the help of the law.
This in effect discharges the contract.
Where the time is of essence, if the contract is not performed on time, the contract comes to an end,
and the party not at fault need not perform his obligation and may sue the other party for damages.
E. Discharge by operation of law – A contract is discharged by operation of law in the following cases
–
1. Death – Sometimes a contract involves personal skills of promise. In such cases the contract is
discharged on the death of the promisor.
2. Insolvency – When a person is adjudged Insolvent then he is released from his all his previous
liabilities. His rights (Assets) and liabilities are transferred to the official assignee or official
receiver as the case may be.
3. Merger – Sometimes, inferior right of a person is merged into superior right contract, in such a
case the inferior, right is vanished and is not required to be enforced. For example an ordinary
debt can be merged. In order of ownership in such case the inferior rights need not to be
enforced because these rights have merged to a superior right of mortgage or ownership.
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4. Loss of evidence of contract – If the evidence of the existence of the contract is lost of vanished.
The contract is discharged; for example document of contract is lost or destroyed and no other
evidence is available the contract is discharged.
F. Discharge by Breach of contract – A contract is something discharged, by its breach generally
breach of contract means refusal of any one party to perform his contractual obligations under the
contract specially a breach of contract occurs when a party to a contract does any of the following
things
1. Fails or refuses to perform his obligation under the contract
2. Disable him from performing his contract.
3. Make the performance of contract impossible by his own acts
BREACH OF CONTRACT
Meaning – A breach of contract occurs if any party refuses or fails to perform his part of contract or by
his act makes it impossible to perform his obligation under the contract.
In case of breach, the aggrieved party is relived from performing his obligation and gets a right to
proceed against the party at fault.
Actual breach of contract – Actual breach of contract takes place in following ways –
(a) On due date of performance – If any party to contract refuses or fails to perform his part of
contract at the time fixed for performance. It is called an actual breach of contract on due date of
performance.
(b) During the course of performance – If any part has performed a part of the contract and then
refuses or fails to perform the remaining part of the contract. It is called an actual breach of
contract during the course of performance.
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1. Rescission of the Contract – Section 39 of the Contract Act lays down that when a party to a
contract has refused to perform or has disabled him from performing his promise in its entirety; the
promisee may put an end to the contract. This is called the right of rescission which means a right to
set aside (i.e. reject) the contract. When the aggrieved party rescinds the contract, he is discharged
from the obligation under the contract
2. Suit for damages – Damages is the monetary compensation which is been paid by the party
breaching the contract to the aggrieved party for any kind of loss occurring due to breach of contract.
The object of awarding damages is not to punish the party at fault but to the recovery of financial
loss occurring to aggrieved party. Following kinds of damages can be claimed in case of breach of
contract.
Amount of Damages
Amount of damages are calculated in following ways:
S.No Options Amount of Damages
When the aggrieved party rescinds the The amount of damages will be equal to the
1 contract at the date of breach difference between the price prevailing on the
date of breach and the control price.
The amount of damages will be difference
When the aggrieved party does not
2 between price on date of performance and the
rescind the contract at the date of breach
contract price.
a. Ordinary Damages – Ordinary damages also called general damages. These are those damages which
arise as a result of breach of contract. General damages are such damages which the law presumes
from the breach of contract. They are awarded to compensate the injured party and not to punish
party at fault. These damages are assesses on the basis of actual loss suffered by the party i.e.
difference between contract price and market price of such goods to breach of contract. Ex: X
contracted to sell 50 tons of wheat @ 8000 Rs. Per ton to y on 1st Jan. Afterward y contracted to sell
those goods to Z @ Rs 10000 per ton. X fails to deliver goods on 1st Jan when price of wheat was
9500Rs per ton. Y is entitled to receive 75000 Rs. i.e. (9500-8000X 50) as ordinary damages i.e.
difference between contract price and market price.
b. Special damages – Special damages are those damages which are result of unusual circumstances
affecting party and their interest. These are the damages which the parties know when they made
the contract as likely to arise from the breach of contract. These damages can be recovered if special
circumstances which would result in special loss of breach of contract. In case of loss aggrieved party
to contract can claim for such damages only when an advance notice of such damages is given before.
c. Exemplary or punitive or vindictive damages – These are those damages which are given in nature of
punishment. The court may award these damages is case of
1. Breach of promise to marry
2. Wrong full dishonor of a Cheque by banker.
d. Nominal Damages – Nominal damages are those damages which are awarded where there is only a
technical relation but aggrieved party has not suffered any loss because of breach of contract.
e. Damages for Inconvenience and discomfort – If a party has suffered any physical inconvenience and
discomfort due to breach of contract, that party can recover the damages for the same discomfort.
f. Liquidated damages & penalty – Liquidated damages is the specified sum which represents a fair and
genuine pre-estimate of the damages likely to arise due to breach. Penalty is disproportionate sum to
damages likely to result due to breach. These specified sum is payable by the party responsible for
breach and is been decided at the time of formation of contract. In India there is no distinction
between penalty and liquidated damages. In English law, liquidated damages are enforceable and
penalty is unenforceable.
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g. Forfeiture of security deposit or (earnest money) – A clause in a contract which provides for
forfeiture of security deposit in the event of failure to perform. In such cases, the court may award
reasonable Compensation only.
3. Suit for quantum meruit – The phrase 'Quantum meruit' means payment in proportion to the
'amount of work done' A right to sue on quantum meruit arises where a contract, partly performed
by one party has discharged by breach of the contract by other party.
4. Suit for specific performance – Suit for specific performance means demanding the court’s direction
to the defaulting party to carry out the promise according to the terms of the contract.
Measure of Damages
The general principle on which damages are assessed is that the injured party must be placed so for as
Possible in the same position as he would occupied if no breach had taken place, but in applying this
principle, the court will not necessarily award the relief to the plaintiff for all the damages he has
suffered.
1 Essential for the formation of The essential for the formation The essential for the formation
a valid contract of a valid contract are absent of a valid contract are present
2 Obligation Obligation is imposed by law. Obligation is created by the
consent of parties.
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a. Right to recover or the Price of Necessaries supplied – The person who has supplied the
necessaries to a person who is incapable of contracting or anyone whom such incapable person
is legally bound to support, is entitled to claim their price from the property of such incapable
person.
b. Right to Recover Money period for another person – A person who is interested in the payment
of money which another is bound by law to pay & who therefore pays it entitled to be
reimbursed by the other.
c. Right to Recover for Non-Gratuitous Act – Such right to recover arises if the following
conditions are satisfied –
1. The things must have been delivered lawfully.
2. The person who has done or delivered the thing must not have intended to do so gratuitously.
3. The person for whom the act is done must have enjoyed the benefit of the act.
d. Responsibility of finder of Goods – A person, who finds goods belonging to another & takes
them into his custody, is subject to the same Responsibility as a Bailee.
e. Right to recover from a person to whom money is paid or thing is delivered, by mistake or
under coercion – A person to whom money has been paid or anything delivered by mistake or
under coercion, must repay or return it.
Quantum Meruit –
The term ‘Quantum Meruit’ means as much as merited or ‘as much as earned’. In other words it means
payment in proportion to the amount of work done. Generally one cannot claim performance from
another unless one has performed his obligation in full but in certain cases, a person who has performed
some work under a contract can claim remuneration for the work which he has already done.
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Liability/Duties of indemnified –
1. Liability to pay all damage/losses
2. Liability to pay all costs related to contract
3. Liability to pay all sums which is received by self for contract from indemnified.
Contract of Guarantee
The object of the contract of guarantee is to enable a person to obtain an employment, or a loan, or some
goods or service on credit.
According to section 126 of the contract Act “A contract of guarantee is a contract to perform the
promise, or discharge the liability, of a third person in case of his default."
The person who gives the guarantee is called the ‘Surety’ or ‘Guarantor’ & the person in respect of
whose default the grantee is given is called the principal debtor, he is the party on whose behalf
guarantee is given and the person to whom the guarantee is given is called the ‘Creditor’.
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Kinds of Guarantee
1. Specific or Simple Guarantee – When a guarantee is given in respect of a single debt or specific
transaction and it’s to come an end when the guarantee debt is paid or the promise is duly
performed. It is called a specific or simple guarantee.
2. Continuing guarantee – Section 129, of the contract Act defines a guarantee which extends to a
series of transactions, is called a continuing guarantee. Thus, a continuing guarantee is not
confined to a single transaction but keeps on moving to prevail transaction continuously.
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1. By revocation
a. Notice by surety
b. Death of surety
c. Notation
2. By the conduct of the creditor
a. Variance (change) in terms of the contract
b. Release or discharge or the principal debtor
c. Certain arrangement made by the creditors with the principal debtors without the consent of
surety
d. Creditors act or omission impairing surety’s eventual (ultimate) remedy.
e. Loss of security
3. By invalidation of contract of guarantee
a. Guarantee obtained by misrepresentation
b. Guarantee by concealment
c. Failure of co-surety to join a surety
Definitions of Bailment
Sec. 184 defines Bailment as the delivery of goods by one person to another for some purpose, upon a
contract, that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person delivering the goods is called the
‘bailor’ and the person to whom they are delivered is called the ‘bailee’.
Examples
(a) A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a contract of
bailment between A and B.
(b) A sells certain goods to B who leaves them in the possession of A. The relationship
between B and A is that of bailor and bailee.
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Kinds/types of Bailment
Types of Bailment
DUTIES OF A BAILEE
Duty to take care of the goods bailed [Section 151 & 152]
Duty not to make any unauthorized use of goods [Sections 154]
Duty not to mix bailor’s goods with his own goods [Section 155 to 157]
Duty to return the goods [Section 160 & 161]
Duty to return accretions to the goods [Section 163]
Rights of a Bailor
1. Right to claim damages in case of negligence [Section 152]
2. Right to terminate the contract in case of unauthorized use [Section 153]
3. Right to claim compensation in case of unauthorized use [Section 154]
4. Right to claim the separation of goods in case of unauthorized mixture [Section 156]
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RIGHTS OF A BAILEE
Right to claim damages [Section 150]
Right to claim reimbursement of expenses [Section 158]
Right to be indemnified in case of premature termination of gratuitous bailment [Section 159]
Right to recover loss in case of bailor’s defective title [Section 164]
Right to recover loss in case of bailor’s refusal to take the goods back [Section 164]
Right to deliver goods to any one of the joint bailors [Section 165]
Right to deliver goods to bailor in case of bailor’s defective title [Section 166]
Right to particular lien [Section 170]
TERMINATION OF BAILMENT
I. Termination of every Contract of Bailment (whether Gratuitous or not)
Every contract of bailment comes to end under the following circumstances:
(a) On the Expiry of Fixed Period
(b) On fulfillment of the Purpose
(c) Inconsistent Use of Goods
(d) Destruction of the Subject Matter of Bailment
II. Termination of Gratuitous Bailment
A contract of gratuitous bailment is terminated in the following circumstances also.
(a) Before the Expiry of a Fixed Period
(b) On Death of Bailor/Bailee
Meaning of Lien
Lien means the right of a person having possession of goods belonging to another to retain those goods
until the satisfaction of sum claimed by the person in possession of the goods. It may be noted that the
possession of goods must be lawful and continuous. For example, X took Y’s godown on a rent of Rs.
5,000 p.m on an agreement that X can at any time deposit or take out his goods from the godown. After
six months, X stopped paying the rent. Y auctioned X’s goods and claimed lien. Y cannot claim lien
because it was agreed that X can take out his goods whenever he wanted.
Type of Lien
(a) Particular Lien [Section 170] a particular lien is a right to retain only those goods in respect of
which some charges are due.
Example: - X gives a piece of cloth to Y, a tailor, to make a coat. Y promises X to deliver the coat as soon
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as it is finished. Y is entitled to retain the coat till he is paid for (if he has not allowed any credit period)
but is not entitled to retain the coat (if he has allowed one month’s credit for the payment.)
(b) General Lien [Section 171] a general lien is a right to retain all the goods as a security for the
general balance of account until the full satisfaction of the claims due whether in respect of those
goods or other goods. The general lien is available to other persons only when there is an express
contract to that effect.
Example: - X deposited US 64 units and shares of Reliance Industries Ltd. as security with Citi Bank and
took a loan against the shares of Reliance Industries Ltd. Citi Bank may retain both the securities until its
claim are fully satisfied.
FINDER OF GOODS
Finder of goods is the person who finds some goods which do not belong to him.
Example If X finds a purse or a diamond ring or a watch, which does not belong to him, he will be called
as finder of goods.
Rights of a Finder of Goods
Right to lien [Section 168]
Right to sue for reward [Section 168]
Right to sell [Section 169]
Duties of a Finder of Goods [Section 171]
Finder of goods is subject to the same responsibility as a bailee. The duties of a finder of goods are as
follows:-
Duty to take reasonable care
Duty not to use for personal purpose
Duty not to mix with his own goods
Duty to find the owner
PLEDGE
Meaning of Pledge (or Pawn) [Section 172]
The bailment of goods as security for payment of a debt or performance of a premise is called pledge (or
pawn).
Example X borrows of Rs. 1 00,000 from Citi Bank and keeps his shares as security for payment of a
debt. It is a contract of pledge.
Meaning of A pawnor (or Pledgor) [Section 172)
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The person who delivers the goods as security for payment of a debt or performance of promise is called
the pawnor or Pledgor. In aforesaid example X is pawnor
Meaning of Pawnee (or pledgee) [Section 172)
The person to whom the goods are delivered as security for payment of a debt or performance of a
promise is called the Pawnee or Pledgee. In the aforesaid example. Citi Bank is the pawnee.
Rights of a Pawnee
Right of retainer [Section 173]
Right to claim reimbursement of extraordinary expenses [Section 173]
Right to sue pawnor [Section 176]
Right to sell [Section 176]
Right against true owner [Section 178 A]
Duties of a Pawnee
Duty to take reasonable care of the goods pledged
Duty not to make unauthorized use of goods
Duty not to mix pawnor’s goods with his own goods
Duty to return goods
Duty to return accretions to the goods
Rights of a Pawnor
Right to get pawnee’s duties duly enforced
Right to redeem [Section 177]
Duties of a Pawnor
Duty to comply with the terms of pledge
Duty to compensate the pawnee for extraordinary expenses [Section 175]
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AGENCY
Meaning of Agency: Agency is relation between an agent and his principal created by an agreement.
Section 182 of the Contract Act defines an Agent as “A person employed to do any act for another,
or to represent another in dealings with third persons. The person for whom such act is done, or who is
so represented is called the principal”.
Duties of an Agent
1. To follow the directions of the principal.
2. To conduct the business of agency with reasonable skill and diligence.
3. To render accounts on demand
4. To communicate with the principal.
5. Not to deal on his own account
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TERMINATION OF AGENCY
Termination of agency means revocation (cancellation) of authority of the agent. All the modes of
termination of agency may be classified are as:
(A) Termination of Agency by the Act of the Parties.
1. by revocation of authority by the principal.
2. by renunciation (giving up) of business of agency by the agent.
3. by mutual agreement
(B) Termination of Agency by Operation of Law
1. Completion of business of agency
2. Death or insanity of principal or agent
3. Insolvency of the principal
4. Destruction of subject matter
5. Expiry of time
6. Agency subsequently becoming unlawful.
7. Termination of sub agent’s authority
Irrevocable Agency
When the authority of agent cannot be revoked by the principal, it is said to be an irrevocable
agency. An agency is irrevocable in the following cases:
1. If the agency is coupled with interest : When an agent himself has a special interest in the
property which forms the subject matter of the agency, such agency is said to be coupled
with interest.
2. Where the agent has partly exercised his authority
3. When the agent has incurred a personal liability.
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UNIT-II
SALE OF GOODS ACT, 1930
It shows that the expression "contract of sale" includes both a sale where the seller transfers the
ownership of the goods to the buyer, and an agreement to sell where the ownership of goods is to be
transferred at a future time or subject to some conditions onto be fulfilled later.
It is a bilateral contract because the property in goods has to pass from one party to another. A person
cannot buy the goods himself. The object of a contract of sale must be the transfer of property (meaning
ownership) in goods from one person to another.
The subject matter must be some goods. The goods must be sold for some price, where the goods are
exchanged for goods it is barter system and it will not be considered as sale.
All essential elements of a valid contract must be present in a contract of sale.
The property in the goods is not intended to and does not pass on delivery though it may sometimes
be the intention of the parties that it should pass in due course. But where goods are delivered to
another on terms which indicate that the property is to pass at once the contract must be one of sale
and not bailment.
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A "hire purchase agreement' is basically a contract of hire, but in addition, it gives the hirer an option to
purchase the goods at the end of the hiring period.
The distinction between the two is very important because, in a hire-purchase agreement the risk of
loss or deterioration of the goods hired lies with the owner and the hirer will be absolved of any
responsibility therefore, if he has taken reasonable care to protect the same as a bailee. But it is
otherwise in the case of a sale where the price is to be paid in installments.
Existing Goods
Existing goods are goods which are either owned or possessed by the seller at the time of the
contract.
Existing goods are specific goods which are identified and agreed upon at the time of the contract
of sale. Ascertained goods are either specific goods at the time of the contract or ascertained or
identified to the contract later on i.e. made specific.
Generic or unascertained goods are goods which are not specifically identified but are indicated by
description.
Future Goods
Future goods are goods to be manufactured or produced or acquired by the seller after the making of
the contract of sale.
Contingent Goods
Where there is a contract for the sale of goods, the acquisition of which by the seller depends upon a
contingency which may or may not happen - such goods are known as contingent goods. Contingent
goods fall in the class of future goods.
Actual sale can take place only .of specific goods and property in goods passes from the seller to
buyer at the time of the contract, provided the goods are in a deliverable state and the contract is
unconditional.
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perished, at the time of making of the contract or become as damaged as no longer to their description
in the contract, the contract is void. (Section 7)
If the seller was aware of the destruction and still entered into the contract, he is stopped from
disputing the contract. Moreover, perishing of goods not only includes loss by theft but also where the
goods have lost their commercial value.
Conditions
If the stipulation forms the very basis of the contract or is essential to the main purpose of the
contract. it is a condition. The breach of the condition gives the aggrieved party a right to treat the
contract as repudiated. Thus, if the seller fails to fulfill a condition, the buyer may treat the contract as
repudiated, refuse the goods and. if he has already paid for them, and recover the price. He can also
claim damages for the breach of contract.
Warranties
If the stipulation is collateral to the main purpose of the contract, i.e. it is a subsidiary promise, it is
a warranty. The effect of a breach of a warranty is that the aggrieved party cannot repudiate the
contract but can only claim damages. Thus, if the seller does not fulfill a warranty. the buyer must
accept the goods and claim damages for breach of warranty.
Section 11 states that the stipulation as to time of payment are not to be deemed conditions (and
hence not to be of the essence of a contract of sale) unless such an intention appears from the contract.
Whether any other stipulation as to time (e.g., time of delivery) is the essence of the contract or not
depends on the terms of the contract.
Implied Warranties/Conditions
Even where no definite representations have been made, the law implies certain representations
as having been made which may be warranties or conditions. An express warranty or condition does
not negative an implied warranty or condition unless inconsistent therewith.
There are two implied warranties:
Implied Warranties
(a) Implied warranty of quiet possession: If the circumstances of the contract are such as there is an
implied warranty that the buyer shall have and enjoy quiet possession of the goods.
(b) Implied warranty against encumbrances: There is a further warranty that the goods are not
subject to any right in favour of a third-party, or the buyer's possession shall not be disturbed by
reason of the existence of encumbrances.
This means that if the buyer is required to, and does discharge the amount of the encumbrance,
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there is breach of warranty, and he is entitled to claim damages from the seller.
Different implied conditions apply under different types of contracts of sale of goods, such as sale
by description, or sale by sample, or sale by description as well as sample. The condition, as to title to
goods applies to all types of contracts, subject to that there is apparently no other intention.
(c) Condition as to wholesomeness: The provisions, (i.e., eatables) supplied must not only answer the
description, but they must also be merchantable and wholesome or sound.
(d) Condition as to fitness for a particular purpose: Ordinarily, in a contract of sale, there is no
implied warranty or condition as to the quality of fitness for any particular purpose of goods supplied.
But there is an implied condition that the goods are reasonably fit for the purpose for which they are
required if:
(i) The buyer expressly or impliedly makes known the intended purpose, so as to show that he
relies on the seller's skill and judgment, and
(j) The goods are of a description which it is in the course of the seller's business to supply
(whether he be the manufacturer or not). There is no such condition if the goods are bought
under a patent or trade name.
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Implied Warranties
Implied warranties are those which the law presumes to have been incorporated in the contract of
sale in spite of the fact that the parties have not expressly included them in a contract of sale. Subject to
the contract to the contrary, the following are the implied warranties in the contract of sale:
(i) Warranty as to quite possession: Section 14(b) provides that there is an implied' warranty
that the buyer shall have and enjoy quiet possession of goods'. If the buyer's possession is
disturbed by anyone having superior title than that of the seller, the buyer is entitled to hold
the seller liable for breach of warranty.
(ii) Warranty as to freedom from encumbrances: Section 14(c) states that in a
contract for sale, there is an implied warranty that the goods shall be so free from any charge
or encumbrances in favour of any third party not declared or known to the buyer before or at
the time when the contract is made'. But. if the buyer is aware of any encumbrance on the
goods at the time of entering into the contract, he will not be entitled to any compensation
from the seller for discharging the encumbrance.
(iii) Warranty to disclose dangerous nature of goods: If the goods are inherently dangerous or
likely to be dangerous and the buyer is ignorant of the danger, the seller must warn the buyer
of the probable danger:
(iv) Warranties implied by the custom or usage of trade: Section 16(3) provides that an implied
warranty or conditions as to quality or fitness for a particular purpose may be annexed by the
usage of trade.
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can be taken over by the official assignee or the official receiver. It will depend upon whether the
property in the goods was with the party adjudged insolvent.
Thus in this context, ownership and possession are two distinct concepts and these two can at times
remain separately with two different persons.
Unless a different intention 'appears, the following things are applicable for ascertaining the intention
of the parties in regard to passing of property in' respect of such goods:
(a) The property in unascertained or future goods sold by description passes to the buyer when
goods of that description and in deliverable state are unconditionally appropriated to the
contract, either by the seller with the assent of the buyer or by the buyer with the assent of the
seller. (Section 23)
(b) If there is a sale of a quantity of goods out of a large quantity.
(c) Delivery by the seller of the goods to a carrier or other buyer for the purpose of transmission to
the buyer in pursuance of the contact is an appropriation sufficient to pass the property in the
goods.
(d) The property in goods, whether specific or unascertained, does not pass if the seller reserves a
right of disposal of the goods. Apart from an express reservation of the right of disposal, the seller
is deemed to reserve the right of disposal in the following two cases:
i) where goods are shipped and by the bill of lading of the goods deliverable to the order or
the seller or his agent.
ii) when the seller sends the bill of exchange for the price of the goods to the buyer for this
acceptance, together with the bill of lading, the property in the goods does not pass to the
buyer unless he accepts the bill of exchange.
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buyer. After the ownership has passed to the buyer, the goods are at the buyer's risk whether the
delivery has been made or not. For example, 'A' buys goods of 'B' and property has passed from 'B' to
'A': but the goods remain in 'B's warehouse and the price is unpaid. Before delivery, 'B's warehouse is
burnt down for no fault of 'B' and the goods are destroyed. 'A' must pay 'B' the price of the goods, as he
was the owner.
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conditions, i.e., they both take place at the same time as in a cash sale over a shop counter.
Delivery
Delivery is the voluntary transfer of possession from one person to another. Delivery may be actual,
constructive or symbolic. Actual or physical delivery takes place where the goods are handed over by the
seller to the buyer or his agent authorised to take possession of the goods. Constructive delivery takes
place when the person in possession of the goods acknowledges that he holds the goods on behalf of and
at the disposal of the buyer
Rules as to delivery
The following rules apply regarding delivery of goods:
(a) Delivery should have the effect of putting the buyer in possession.
(b) The seller must deliver the goods according to the contract.
(c) The seller is to deliver the goods when the buyer applies for delivery; it is the duty of the buyer
to claim delivery.
(d) Where the goods at the time of the sale are in the possession of a third person, there will be
delivery only when that person acknowledges to the buyer that he holds the goods on his
behalf. .
(e) The seller should tender delivery so that the buyer can take the goods. It is not the duty of the
seller to send or carry the goods to the buyer unless the contract so provides. But the goods
must be in a deliverable state at the time of delivery or tender of delivery. If by the contract the
seller is bound to send the goods to the buyer, but no time is fixed, the seller is bound to send
them within a reasonable time.
(f) The place of delivery is usually stated in the contract. Where it is so stated, the goods must be
delivered at the specified place during working hours on a working day. Where no place is
mentioned, the goods are to be delivered at a place at which they happen to be at the time of the
contract of sale and if not then in existence they are to be delivered at the price they are
produced.
(g) The seller has to bear the cost of delivery unless the contract otherwise provides. While the cost
of obtaining delivery is said to be of the buyer, the cost of the putting the goods into deliverable
state must be borne by the seller. In other words in the absence of an agreement to the
contrary, the expenses of and incidental to making delivery of the goods must be borne by the
seller, the expenses of and incidental to receiving delivery must be borne by the buyer.
(h) If the goods are to be delivered at a place other than where they are, the risk of deterioration in
transit will, unless otherwise agreed, be borne by the buyer.
(i) Unless otherwise agreed, the buyer is not bound to accept delivery in Installments.
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Installment Deliveries
When there is a contract for the sale of goods to be delivered in stated installments which are to be
separately paid for, and either the buyer or the seller commits a breach of contract, it depends on the
terms of the contract whether the breach is a repudiation of the whole contract or a severable breach
merely giving right to claim for damages.
Where the price is payable on a certain day regardless of delivery, the seller may sue for the price, if it is
not paid on that day, although the property in the goods has not passed.
Where the buyer wrongfully neglects or refuses to accept the goods and pay for them, the seller may
sue the buyer for damages for non-acceptance.
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue
him for damages for non-delivery.
Where there is a breach of warranty or where the buyer elects or is compelled to treat the breach of
condition as a breach of warranty, the buyer cannot reject the goods. He can set breach of warranty in
extinction or diminution of the price payable by him and if loss suffered by him is more than the price
he may sue for the damages.
If the buyer has paid the price and the goods are not delivered, the buyer can sue the seller for the
recovery of the amount paid. In appropriate cases the buyer can also get an order from the Court that
the specific goods ought to be delivered.
Anticipatory Breach
Where either party to a contract of sale repudiates the contract before the date of delivery, the other
party may, either treat the contract as still subsisting and wait till the date of delivery, or he may treat
the contract as rescinded and sue for damages for the breach.
In case the contract is treated as still subsisting it would be for the benefit of both the parties and the
party who had originally repudiated will not be deprived of:
(a) his right of performance on the due date in spite of his prior repudiation or
(b) his rights to set up any defense for non-performance which might have actually arisen after the
date of the prior repudiation.
Measure of Damages
The Act does not specifically provide for rules as regards the measure of damages except stating
that nothing in the Act shall affect the right of the seller or the buyer to recover interest or special
damages in any case were by law they are entitled to the same. The inference is that the rules laid down
in Section 73 of the Indian Contract Act will apply.
Unpaid Seller
The seller of goods is deemed to be unpaid seller:
(a) When the whole of the price has not been paid or tendered; or
(b) When a conditional payment was made by a bill of exchange or other negotiable instrument,
and the instrument has been dishonoured.
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(a) Lien: - An unpaid seller in possession of goods sold, may exercise his lien on the goods, i.e., keep
the goods in his possession and refuse to deliver them to the buyer until the fulfillment or tender of
the price in cases where:
The lien depends on physical possession. The seller's lien is possessory lien, so that it can be exercised
only so long as the seller is in possession of the goods. It can only be exercised for the non-payment of
the price and not for any other charges.
A lien is lost
(i) When the seller delivers the goods to a carrier or other bailee for the purpose of transmission to
the buyer, without reserving the right of disposal of the goods;
(ii) When the buyer or his agent lawfully obtains possession of the goods;
(iii) By waiver of his lien by the unpaid seller.
(b) Stoppage in transit: - The right of stoppage in transit is a right of stopping the goods while they are
in transit, resuming possession of them and retaining possession until payment of the price.
The right to stop goods is available to an unpaid seller
(i) when the buyer becomes insolvent; and the goods are in transit.
The buyer is insolvent if he has ceased to pay his debts in the ordinary course of business, or cannot
pay his debts as they become due. It is not necessary that he has actually been declared insolvent by the
Court.
The goods are in transit from the time they are delivered to a carrier or other bailee like a wharfinger
or warehouse keeper for the purpose of transmission to the buyer and until the buyer takes delivery of
them.
The transit comes to an end in the following cases:
(i) If the buyer obtains delivery before the arrival of the goods at their
destination;
(ii) If, after the arrival of the goods at their destination, the carrier acknowledges to the buyer that he
holds the goods on his behalf, even if further destination of the goods is indicated by the buyer.
(iii) If the carrier wrongfully refuses to deliver the goods to the buyer.
If the goods are rejected by the buyer and the carrier or other bailee holds them, the transit will be
deemed to continue even if the seller has refused to receive them back.
The right to stop in transit may be exercised by the unpaid seller either by taking actual possession of
the goods or by giving notice of the seller's claim to the carrier or other person having control of the
goods. On notice being given to the carrier he must redeliver the goods to the seller, who must pay the
expenses of the redelivery.
The seller's right of lien or stoppage, in transit is not affected by any sale on the part of the buyer
unless the seller has assented to it. A transfer, however, of the bill of lading or other document of seller
to a bona fide purchaser for value is valid against the seller's right.
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If on a re-sale, there is a deficiency between the price due and amount realized, the re-seller is entitled
to recover it from the buyer. If there is a surplus, he can keep it. He will not have these rights if he has
not given any notice and he will have to pay the buyer any profits.
(d) Rights to withhold delivery:- If the property in the goods has passed, the unpaid seller has right as
described above. If, however, the property has not passed, the unpaid seller has a right of withholding
delivery similar to and co-extensive with his rights of lien and stoppage in transit.
The seller may sue the buyer even if the property in the goods has not passed where the price is
payable on a certain day.
Under Section 56, the seller may sue the buyer for damages for breach of contract where the buyer
wrongfully neglects or refuses to accept and pay for the goods.
Thus an unpaid seller’s right against the buyer personally is:
(a) a suit for the price.
(b) a :suit for damages.
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UNIT-III
Negotiable Instruments Act, 1881
The Negotiable Instruments Act was enacted, in India, in 1881 and it came into force on 1st March, 1881.
Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India,
and the present Act is also based on the English Act with certain modifications. It extends to the whole of
India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31
and 32 of the Reserve Bank of India Act, 1934
Definition
A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order
or to bearer.
Explanation (i) - A promissory note, bill of exchange or cheque is payable to order which is expressed to
be so payable or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation (ii) - A promissory note, bill of exchange or cheque is payable to bearer which is expressed
to be so payable or on which the only or last endorsement is an indorsement in blank.
Explanation (iii) - Where a promissory note, bill of exchange or cheque, either originally or by
endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it
is nevertheless payable to him or his order at his option.
(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made
payable in the alternative to one of two, or one or some of several payees. The word negotiable means
‘transferable by delivery,’ and the word instrument means ‘a written document by which a right is
created in favour of some person.’ Thus, the term “negotiable instrument” literally means ‘a written
document which creates a right in favour of somebody and is freely transferable by delivery.’
A negotiable instrument is a piece of paper which entitles a person to a certain sum of money
and which is transferable from one to another person by a delivery or by endorsement and delivery.
“According to Blackburn J, a negotiable instrument has two characteristics namely
1. It is transferable, like cash, by delivery (which assumes it is in a deliverable state) so that the
transferee can enforce the rights embodied in it in his own name.
2. The transferee being a bonafide holder for value can acquire a better title to it than that of his
transferor.”
Negotiable Instrument is moreover a document of title which clearly explains the rights towards the
payment of money or a security for money which is transferable by delivery either by custom or by
legislation. The use of negotiable Instrument is mainly to facilitate payment for exports and imports of
trade. The rapid growth of technology has revolutionized the world with computer, which is used in
every field of profession. This has reduced the use of negotiable instrument and in future it may decline
more. Even though the electronic revolution has got more advantages it may be considered as the next
step because the world needs time to get used to it. But, the negotiable instrument are still in use.
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3. Transferee can sue in his own name without giving notice to the debtor:
A bill, promissory note or a cheque represents a debt, i.e., an “actionable claim” and implies the right of
the creditor to recover something from the debtor.
The creditor can either recover this amount himself or can transfer his right to another person.
In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the
instrument in his own name in case of dishonour, without giving notice to the debtor of the fact that he
has become holder.
In case of transfer or assignment of an ordinary “actionable claim” i.e., a book debt evidenced by an entry
by the creditor in his account book, under the transfer of property act, notice to the debtor is necessary
in order to make the transferee entitled to sue in his own name.
4. Presumptions:
Certain presumptions apply to negotiable instruments. Section 118, 119 and 139 lay down the
following presumptions:
(a) For consideration : that every negotiable instrument, was made, drawn, accepted, endorsed or
transferred for consideration.
(b) As to date : that every negotiable instrument bearing a date was made or drawn on such date.
(c) As to time of acceptance : that every bill of exchange was accepted within a reasonable time after
its date and before its maturity.
(d) As to transfer: that every transfer of a negotiable instrument was made before its maturity
(e) As to time of endorsements : that the endorsements appearing upon a negotiable instrument were
made in the order in which they appear thereon.
(f) As to stamps : that a lost promissory-note, bill of exchange or cheque was duly stamped.
(g) As to a holder in due course: that every holder of a negotiable instrument is holder in due course
(this presumption would not arise where it is proved that the holder has obtained the instrument from
its lawful owner, or from any person in lawful custody thereof, by means of an offence, fraud or for
unlawful consideration and in such a case the holder has to prove that he is a holder in due course
(h) As to dishonour: that the instrument was dishonoured, in case a suit upon a dishonoured
instrument is filed with the court and the fact of protest is proved.
Negotiable instruments recognized by usage or customs of trade: There are certain other instruments
which have acquired the characteristic of negotiability by the usage or custom of trade.
For example: Exchequer bills, Bank notes, Share warrants, Circular notes, Bearer debentures, Dividend
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Promissory Note
Definition: According to Section 4 of Negotiable Instruments Act, “A promissory note is an
instrument in writing (not being a bank-note or a currency-note) containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain
person, or to the bearer of the instrument.”
In course of transfer of a promissory note by payee and others, the parties involved may be –
(a) The Endorser – the person who endorses the note in favour of another person.
(b) The Endorsee – the person in whose favour the note is negotiated by endorsement.
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payable
4. It must be signed by the maker: It is imperative that the promissory note should be duly
authenticated by the ‘signature’ of the maker
‘Signature’ means the writing or otherwise affixing a person’s name or a mark to represent his name, by
himself or by his authority with the intention of authenticating a document.
5. The maker must be a certain person:
The instrument must itself indicate with certainty who is the person or are the persons engaging himself
or themselves to pay
Alternative promisors are not permitted in law because of the general rule that “where liability lies no
ambiguity must lie”
7. The undertaking must be to pay a certain and definite sum of money only.
For a valid pronote it is also essential that the sum of money promised to be payable must be certain and
definite
The amount payable must not be capable of contingent additions or subtractions
Illustrations: A signs the instruments in the following terms:
“I promise to pay B Rs.500 and all other sums which shall be due to him”
“I promise to pay B Rs.500, first deducting thereout any money which he may owe me”
The above instruments are invalid as promissory notes because the exact amount to be paid by A is not
certain
Bill of Exchange
Definition: Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as follows:
“A bill of exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of,
a certain person or to the bearer of the instrument.” It is also called a Draft.
Illustration:
Mr. X purchases goods from Mr. Y for Rs.1000/-
Mr. Y buys goods from Mr. S for Rs.1000/-
Then Mr. Y may order Mr. X to pay Rs.1000/- Mr. S which will be nothing but a bill of exchange.
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(iii) The Payee – The person to whom the payment is to be made. The person named in the instrument,
to whom or to whose order the money are directed to be paid by the instruments are called the payee.
The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words
in the bill would be Pay to us or order.
In a bill where a time period is mentioned, is called a Time Bill.
But a bill may be made payable on demand also. This is called a Demand Bill.
Cheque
Definition: A cheque is bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the
electronic form. (Sec. 6, NIA)
Explanation I - For the purposes of this section, the expressions-
(a) a cheque in the electronic form means a cheque which contains the exact mirror image of a paper
cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards
with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) a truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by
the clearing house or by the bank whether paying or receiving payment, immediately on generation of
an electronic image for transmission, substituting the further physical movement of the cheque in
writing.
Explanation II - For the purposes of this section, the expression clearing house means the clearing
house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve
Bank of India.
Parties to a cheque
Drawer: Drawer is the person who draws or makes the cheque.
Drawee: Drawee is the drawer’s banker on whom the cheque has been drawn.
Payee: Payee is the person who is entitled to receive the payment of a cheque.
Crossing of Cheques
A Crossed Cheque is one which bears across its face two parallel transverse lines with or without certain
words. Such lines are usually drawn on the left side top corner of the face of the Cheque. However, such
lines can be drawn anywhere on the face of the Cheque.
Crossing of Cheque is a direction to the drawee bank to pay the amount of the Cheque to a bank or to a
particular bank. Therefore, a crossed Cheque is not payable to the payee or holder at the counter of the
bank. In order to get the payment of the Cheque, it is required to be deposited in an account with a bank.
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The bank, in turn, presents the Cheque to the drawee bank and gets payment on behalf of the payee or
indorsee of the Cheque.
The objects of crossing of a Cheque are as follows:
To direct the drawee bank to pay the amount of the Cheque only to a bank or a particular bank;
To prevent the payment of the Cheque to an unauthorized or wrong person.
KINDS OF CROSSING
Crossing of Cheque is basically of two kinds:-
1. General crossing, and
2. Special crossing.
These basic kinds of crossing may take several forms. Some of them are:
3. Restrictive crossing.
4. Not negotiable crossing.
1. General crossing: A Cheque is deemed to be generally crossed in any of the following cases:
a. When it bears across its face two parallel transverse lines without any words.
b. When it bears across its face an addition of the words “and company” or any abbreviation thereof
between two parallel transverse lines. It may also be with or without the words ‘Not negotiable’.
2. Special crossing: A Cheque is said to be specially crossed when the name of a banker is added across
the face of the Cheque, either with or without words, not negotiable. Usually, two parallel transverse lines
are used in special crossing but they are required not by law.
3. Restrictive crossing: Restrictive crossing has not been described anywhere in the Negotiable
Instrument Act. It is a type of crossing which has evolved out of business and banking usage and now
recognized by the law. Every Cheque crossed wither generally or specially may be crossed restrictively
credit the proceeds of the Cheque only to the account of the payee.
4. Not negotiable crossing: Sometimes, a Cheque crossed generally or specially contains the words ‘not
negotiable’ A crossing with such words is said to be ‘not negotiable’ crossing.
The words ‘not negotiable’ on a crossed Cheque destroy the negotiable character of the
Cheque but not the transferability of the Cheque. Therefore, any person taking a crossed Cheque bearing
the words ‘not negotiable’ shall not have and shall not be capable of giving a better title to the Cheque
than the title of the person from whom he took it. [Sec. 130]
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1. Who is entitled in his own name to the possession of the instrument, and
2. Who has the right to receive or recover the amount due thereon from the parties thereto.
Characteristics:
a) Entitled to possession of an instrument
b) Entitled to receive or recover the amount
c) Holder of lost or destroyed instrument
Powers of Holder
I. He is entitled in his own name to the possession of the instrument.
II. He can receive or recover the amount due on the instrument.
III. If necessary, he can sue the parties in order to recover the money due on the instrument.
IV. He can validly discharge the instrument on payment of the instrument.
V. He may indorse the instrument to any other person
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1. Definition Holder is a person who is entitled in Holder in due course is a person who
his own name to the possession of becomes the possessor of the
the instrument and to receive the instrument for consideration before its
amount due on it. maturity and in good faith. [Sec. 9]
2. Consideration A holder need not necessarily acquire A holder in due course can acquire the
the instrument for consideration. For instrument for consideration only.
instance, a holder may get the
instrument by way of gift.
3. Before maturity A holder may obtain possession A holder in due course must obtain the
before or after the maturity of the possession before maturity of the
instrument. instrument.
4. Good faith A holder need not necessarily acquire A holder in due course must always
possession of the instrument in good acquire possession of the instrument in
faith. good faith.
5. Inchoate A holder can claim only the amount A holder in due course can claim any
instrument which signer of the inchoate amount filled in the inchoate instrument
instrument intended to pay. provided it is covered by the stamp
affixed on it. [Sec. 20]
6. Right against A holder does not have rights against A holder in due course has rights against
prior parties all the prior parties. He has rights every prior party to the instrument. He
against the original parties and his can hold them liable jointly and
immediate indorser. severally.[Sec. 36]
7. Title better A holder can never get a better title A holder in due course can acquire a
than the than that of the transferor. better title than that of the transferor. In
transferor other words he gets the instrument
cleansed of all prior defects.
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Negotiation
One of the essential features of a negotiable instrument is its transferability. A negotiable instrument may
be transferred from one person to another in either of the followings way-
1. By negotiation
2. By assignment
2) By Assignment –
When a holder of a bill, promissory note or cheque transfers the same to another, he in fact gives his
right to receive the payment of the instrument to the transferee.
Endorsement
The word “endorsement” in its literal sense means, writing on the back of an instrument. But under the
Negotiable Instruments Act, it means, the writing of one’s name on the back of the instrument or any
paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a
negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called
an “endorser”, and the person to whom negotiable instrument is transferred by endorsement is called the
“endorsee”. Who may Endorse / Negotiate [Section 51]: Every Sole maker, drawer, payee or endorsee, or
all of several joint makers, drawers, payees or endorsees of a negotiable instrument may endorse and
negotiate the same if the negotiability of such instrument has not been restricted or excluded as
mentioned in Section 50.
When the maker or holder of a negotiable instrument signs the instrument (otherwise than as maker)
for the purpose of its negotiation, it is said to be the Endorsement of the instrument. [Section 15]
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Kinds of Endorsements
1. Blank or general Endorsement: When the indorser signs his name only on the instrument for the
purpose of its negotiation, it is called the blank or general Endorsement. Illustration: Anta has a Cheque
payable to ‘Anta or order’ Anta merely signs on the instrument. It constitutes a blank Endorsement.
2. Full or special Endorsement: When an indorser signs his name and adds a direction to pay the
amount mentioned in the instrument to or to the order of a specified person, it is called the Endorsement
in full. Illustration: Anita is a holder of a Cheque. He writes ‘Pay Banta or Order or Pay Banta only’ and
signs the Cheque. It is a full or special Endorsement.
3. Restrictive Endorsement: Illustration: (a) ‘Pay the contents to Banta only’. (b) ‘Pay Banta for my use’.
4. Partial Endorsement: Sometimes, an Endorsement purports to transfer only a part of the amount of
the instrument. Such an Endorsement is called as partial Endorsement. It is not a valid Endorsement for
the purpose of negotiation.
5. Conditional or qualified Endorsement: When an indorser inserts a condition in his Endorsement, it
is called a conditional Endorsement. Sometimes, an indorser by express words in the Endorsement may
exclude his liability on the instrument makes the right of the indorsee to receive the amount due thereon
on the happening of a specified event or on the implement of some condition. In such a case, the
Endorsement is said to be conditional.
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Effects of Endorsement:
1. An unconditional Endorsement of a negotiable instrument followed by an unconditional delivery
of the instrument has the following effects:
2. The property in the instrument stands transferred to the indorsee.
3. The indorsee gets the right of further negotiation of the instrument [Sec. 50]
4. The indorsee is entitled to sue all parties, whose names appear on it.
2) By party primarily liable by becoming holder (Section 90): If the maker of a note or the
acceptor of a bill becomes its holder at or after its maturity in his own right, The Negotiable
Instruments Act, 1881 4.5 instrument is discharged.
3) By express waiver: When the holder of a negotiable instrument at or after its maturity
absolutely and unconditionally renounces in writing or gives up his rights against all the parties
to the instrument, the instrument is discharged. The renunciation must be in writing unless the
instrument is delivered up to the party primarily liable.
4) By Cancellation: Where an instrument is intentionally cancelled by the holder or his agent and
the cancellation is apparent thereon, the instrument is discharged. Cancellation may take place;
by crossing out signatures on the instrument, or by physical destruction of the instrument with
the intention of putting an end to the liability of the parties to the instrument.
5) By discharge as a simple contract: A negotiable instrument may be discharged in rile same way
as any other contract for the payment of money. This includes for example, discharge of an
instrument by innovation or rescission or by expiry of period of limitation.
Dishonor by Non-acceptance:
Only a bill may be dishonored by non acceptance. A bill is deemed to be dishonored by non acceptance in
any of the following cases:
a. Refused to accept
b. Not signed by all the drawees
c. Not accepted by any partner
d. Bill not accepted within forty eight hours.
e. Drawee could not be found
Dishonour by Non-payment:
a. Default in payment
b. When excused from presentment
On the dishonour of a cheque, one can file a suit for recovery of the cheque amount along with the cost &
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interest under order XXXVII of Code of Civil Procedure 1908 (which is a summary procedure and) can
also file a Criminal Complaint u/s 138 of Negotiable Instrument Act for punishment to the signatory of
the cheque for haring committed an offence. However, before filing the said complaint a statutory notice
is liable to be given to the other party.
NOTICE OF DISHONOUR
When a negotiable instrument is dishonored by non acceptance (bill) or by non-payment, the holder may
sue against the parties liable for the same. But he can do so only when he has served a formal notice to
the effect.
The notice of dishonor is necessary for two reasons:
a. To warn the party about his liability.
b. To secure rights of the holder
Notice by Whom?
The notice of dishonor may be given by any of the following:
i. By the holder.
ii. By any party receiving the notice of dishonor. He may do so if he wants to hold any prior
party liable to himself.
iii. By an agent of the holder
Notice to Whom?
i. To all prior parties.
ii. To some one of the several parties.
iii. To an agent of the person.
iv. To the legal representative, in case the party liable is dead.
v. To the official assignee, in case the party liable has been declared insolvent.
Ingredients of the offence under Section 138, NIA: It is manifest that to constitute an offence under
Section 138 of NIA, the following ingredients are required to be fulfilled:
1. a person must have drawn a cheque on an account maintained by him in a bank for payment of a
certain amount of money to another person from out of that account for the discharge, in whole
or in part, of any debt or other liability; that cheque has been presented to bank within a period
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of three months from the date on which it is drawn or within the period of its validity whichever
is earlier;
2. that cheque is returned by the bank unpaid, either because of the amount of money standing to
the credit of the account is insufficient to honour the cheque or that it exceeds the amount
arranged to be paid from that account by an agreement made with the bank;
3. the payee or the holder in due course of the cheque makes a demand for the payment of the said
amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the
receipt of information by him from the bank regarding the return of the cheque as unpaid;
4. The drawer of such cheque fails to make payment of the said amount of money to the payee or
the holder in due course of the cheque within 15 days of the receipt of the said notice.
NOTING
Meaning – Noting is the process of recording the fact and reasons of dishonor of negotiable instrument
by the notary public upon the dishonored instrument. In other words, noting consists of recording and
authenticating the fact and reasons of dishonor of a negotiable instrument by the notary public.
Need – Noting is not compulsory in the case of an inland bill or note. But noting serves as an authentic
and official proof of dishonor of an instrument by non acceptance or non-payment. It serves as an
evidence of dishonor of a negotiable instrument in the legal proceedings before the Court.
Procedure of Noting – When a promissory note or a bill of exchange is dishonoured, the holder may
request within a reasonable time after its dishonor to a notary public for its noting. On receipt of the
request, the notary public takes following steps:
The notary public makes a formal demand upon the acceptor or maker for acceptance or payment. It
may be noted that such demand may be made either by the notary public personally or by his clerk. If
authorized by agreement or usage, the demand may be made by a registered letter.
When it is not then accepted or paid, the notary public records the fact of dishonor upon the instrument,
or upon a paper attached thereto or party upon each.
In addition, the notary public also makes a reference of his register and puts signature with seal on the
instrument.
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PROTEST
Protest is a certificate issued by a notary public attesting the fact of dishonor of a negotiable instrument
recorded upon the dishonored instrument.
Contents of protest
1. The instrument itself or a literal transcript of it which must contain everything written or printed
thereon.
2. The name of the person for whom and against whom the instrument has been protested.
3. A statement that payment or acceptance, or better security (as the case may be) has been
demanded of such person by the notary public; and the terms of his answer, if any
4. If the person gave no answer, or that he could not be found a statement to that effect.
5. The date, place and time of dishonor of the instrument. If better security has been refused; the
place and time of refusal.
Conclusion
Negotiable Instruments plays a major role in the trade world. We can also see the use of negotiable
instruments in the international trade. We can assume that the international trade is also developing with
the negotiable instrument. The nature of negotiable instrument is an area of law which has major
influence on any person in his professional field. Negotiable instrument plays a major role in different
part of the world in raising the economy. The negotiable instrument is of contractual in nature and it
characterizes the fact that it is negotiable.
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UNIT-IV
CONSUMER PROTECTION ACT 1986
Introduction
The Consumer Protection Act, 1986 has been enacted to provide for the establishment of consumer
councils and other authorities for the settlement of consumers’ disputes and for matters connected
therewith. In fact, the basic motive of enacting this important Act is to provide cheaper and speedy
remedies to the consumers who are in disadvantageous position in comparison with the traders who
were well organized and ruling the market.
IMPORTANT DEFINATION
COMPLAINANT Sec. 2(1) (13)
“Complainant” means-
(i) a consumer; or
(ii) any voluntary consumer association registered under the Companies Act, 1956 (1 of 1956).
Or under any other law for the time being in force; or
(iii) the Central Government or any State Government, who or which makes a complaint;
(iv) one or more consumers, where there are numerous consumers having the same interest
(v) in case of death of a consumer, his legal heir or representative*”
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(iv) a trader or the service provider has charged for the goods or for the service mentioned in the
complaint a price in excess of the price (a) fixed by or under any law for the time being in force, (b)
displayed on the goods or any package containing such goods, (c) displayed on the price list
exhibited by him, (d) agreed between the parties.
(v) Goods which will be hazardous to life and safety when used are being offered for sale to the public
in contravention of any law for the time being in force.
(vi) service which are hazardous or likely to be hazardous to life and safety of the public when used*”
CONSUMER DISPUTE
“Consumer dispute” means a dispute where the person against whom a complaint has been made,
denies or disputes the allegations contained in the complaint;
DEFECT
“defect’ means any fault, imperfection or shortcoming in the quality, quantity, potency, purity, or
standard which is required to be maintained by or under any law for the time being for or under any
contract, express or implied or as it claimed by the trader is any manner whatsoever in relation to any
goods;”
“Manufacture” means a person who-
(i) makes or manufactures any goods or parts thereof : or
(ii) does not make or manufacture any goods but assembles parts thereof made or manufactured by
other; or
(iii) puts or causes to be put his own mark on any goods made or manufactured by any other
manufacture.
PERSON
: “person” includes-
(i) a firm whether registered or not;
(ii) a Hindu undivided family;
(iii) a co-operative society
(iv) every other association of persons whether registered under the Societies Registration Act.
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machinery at the District, State and National levels. The three consumer disputes redressal agencies
at the different levels are as under:
1. Consumer Disputes Redressal Forum to be known as District Forum at the District level.
2. Consumer Disputes Redressal Commission to be known as State Commission at the State level.
3. National Consumer Disputes Redressal Commission to be known as National Commission at the
National level.
ESTABLISHMENT OF AGENCIES
1 DISTRICT FORUM
The ‘District Forum’ is the short name of the Consumer Disputes Redressal Forum established in the
District under Section 9(a) of the Consumer Protection Act, It is the redressal agency to deal with the
complaints of the consumers at the District level.
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I. Reference of complaint to opposite party – Whenever the district forum receives a complaint,
relating to a goods, it should refer a copy of the complaint to the opposite party. It must be given within
30 days of receiving the complaint. However, it may be extended by a further period not exceeding 15
days.
II. On refusal of dispute by opposite party – When the opposite party, on receipt of a complaint, denies
or disputes the allegations in the complaint or does not reply within the time, the District Forum shall
proceed to settle dispute. The Act does not make mandatory the personal hearing of complaint or
opposite party, probably to expedite the disposal of cases.
STATE COMMISSION
‘State Commission’ is the short name given to the Consumer Disputes Redressal Commission
established in the State under Section 9(b) of the Consumer Protection Act, 1986 [Section] 2(1) (p).
It is the redressal agency to deal with the complaints of the consumers at the State level.
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NATIONAL COMMISSION
The ‘National Commission’ is the short name given to the National Consumer Disputes Redressal
Commission established in the country under Section 9(c) of the Consumer Protection Act, 1986.
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These disqualifications are the same as already discussed in case of members of District Forum
and of State Commission. Any other disqualification may also be prescribed the Central Government.
4. Tenure of office of the members of the National Commission
The President or the members of the National Commission shall hold the office for a term of 5 year
or up to the age of 70 years, whichever is earlier. Thus, in any case, a person cannot hold the office
of President or that of a member beyond the age of 70 years.
5. Jurisdiction of the National Commission
(a) Pecuniary jurisdiction: The National Commission has the jurisdiction to entertain
complaints where the value of the goods or services and compensation, if any claimed
exceeds rupees 1 crore .Prior to the Consumer Protection (Amendment) Act, 2002, the
National Commission had the jurisdiction where the value of this claim exceeded rupees
twenty lakhs.
(b) Appellate jurisdiction: The National Commission also has the appellate jurisdiction to
entertain appeals against the order of any State Commission.
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UNIT-V
Company
The word ‘company’ in its literary sense, conveys the idea of togetherness. In the business world, the
word ‘company’ may be found being used loosely for any large business concern. In the legal sense the
word ‘company’ point towards a very specific form of business set-up, floated and run by more than
one person. This is the body corporate form of business organization.
Definition of a Company
Company : sec.3 (1)(i)- “ Company means a company formed and registered under this Act or an
existing company”
clause (ii) of Sec.3 (1) defines an existing company as follows :
“Existing company” means a company formed and registered under any of the previous companies
laws…”
Thus, every such organization would be a company which is registered under the relevant law as a
company before or after the enactment of the companies Act, 1956.
Lord Justice Lindley: “A company is an association of persons who contribute money to a common
stock and employed in some trade or business and who share the profit and loss arising there from. The
common stock so contributed is denoted in money in money and is the capital of the company”.
Haney : “A Company is an artificial person created by law having separate entity with a perpetual
succession and common seal.”
I. Statutory Exceptions-
1. When the number of members falls below statutory minimum (Sec. 45)
2. Misdiscription in prospectus (Sec. 62)
3. Failure to refund application money [Sec.69 (5)]
4. Misdiscription representation of name (Sec. 147)
5. Subsidiary company (Sec. 212 & 214)
6. For investigation into affairs of related companies (Sec. 239)
7. for investigation of ownership of a company (Sec. 247)
8. Fraudulent conduct (Sec. 542)
9. Liability for pre-incorporation contracts
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KINDS OF COMPANIES
The incorporated bodies or the companies may be put in various classes on the basis of
following aspects :
A. Mode of formation.
B. Permitted number of members.
C. Liability of members
D. Control of management.
A private company means a company which has a minimum paid-up capital of one lakh rupees or such
higher paid-up capital as may be prescribed, and by its articles.
(a) restricts the right to transfer its shares, if any;
(b) Limits the number of its members to 50 not including.
(i) persons who are in the employment of the company; and
(ii) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased.
(c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of,
the company; and
(d) Prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.
2. Public company
Sec. 3 (1) (iv) has defined a public company as follows :
Public Company ; A public company means a company which –
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may
be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company.
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held but on the guarantee given by the members. Sec. 12(2) (b) states that this is a company
having the liability of its members limited by the memorandum to such amount as the
members may respectively undertake by the memorandum to contribute to the assets of the
company in the event of its being would up.
3. Unlimited company. The unlimited company may or may not have share capital. The
members liability being unlimited, the quantum of share capital is not a very crucial
mater. If it has share capital, it can be easily increased or reduced by altering the
Articles. The restrictions on changes in capital are not relevant for an unlimited liability
company. Such a company may purchase its own shares and is free from the restrictions
provided by Sec. 77.
(D) ON THE BASIS OF CONTROL OVER MANAGEMENT
A company is supposed to be autonomous in running its affairs but working under the
supervision of law. Sometimes, however, a company may exercise control over another
company. The former would be called a holding company and the latter its subsidiary company.
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Foreign company: Foreign companies are the companies falling under the following two
categories:
(a) Companies incorporated outside India which, after the commencement of this Act, establish
a place of business within India; and
(b) Companies incorporated outside India which have, before the commencement of this Act,
established a place of business within India and continue to have an established place of
business within India at the commencement of this Act.
4. One-man company
Where almost the entire shareholding in a company is under the ownership of a single person,
while a few more members, usually the family members, are there in the company to comply with
the requirements of minimum number of members, such a company is commonly called a one-man
company or a family company.
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3. Maximum number of members. In case of private company the membership must not exceed 50
whereas there is no such restriction on the maximum number of members for a public company
(Sec. 3).
4. Transferability of shares. In a private company, the right to transfer shares is restricted, whereas in
the case of public company the shares are freely transferable (Secs. 3 and 82).
5. Prospectus. A private company cannot issue a prospectus; while a public company may issue a
prospectus to invite the general public to subscribe for its shares or debentures.
6. Statement in lieu of prospectus. A public company, if it does not issue a prospectus, is required to
file a Statement in lieu of prospectus with the Registrar of Companies at least 3 days before
allotment. A private company is not required to do this.
7. Minimum number of directors. A private company must have at least two directors, whereas a
public company must have at least three directors (Sec. 252).
8. Increase in number of directors. The number of directors in a private company may be increased
to any extent but in case of a public company if the maximum number of directors is more than
twelve, then the approval of the Central Government is necessary for any increase in the number of
directors (Secs 258 and 259).
9. Appointment of directors. Directors of a private company may be appointed by a single
resolution, but it is not so in case of a public company where each director is to be appointed by a
separate resolution (Sec. 255).
10. Retirement of directors. Directors of a private company are not required to retire by rotation, but
in case of a public company at least 2/3rds of the directors must retire by rotation at each annual
general meeting (Sec. 256).
11. Quorum for general meetings. Two members personally present form the quorum in a private
company but in a public company the number is five members (Sec. 174).
2. Conversion by operation of law (deemed public company) The Companies (Amendment) Act,
1960 introduced a new Sec. 43-A with a view to deal with those private companies which employed
public money to a large extent but escaped the restrictions and limitations as to disclosure as apply
to public companies J
The Companies (Amendment) Act, 2000 abolished Sec. 43-A with effe from 13th December,
2000.
3. Conversion by choice or volition (Sec. 44). If a private company so alters its Articles that they do
not contain the provisions which make it a private company, it shall cease to be a private company
as on the date of the alteration. Il shall then file with the Registrar, within 30 days, either a prospectus
or a statement in lieu of prospect us..
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FORMATION OF A COMPANY
The process of formation of a company can be divided and discuss under the following four stages:
1. Promotion;
2. Incorporation or Registration:
3. Capital Subscription;
4. Commencement of Business
Of these stages only the first two are necessary for the formation of a private company, and of a public
company not having any share capital. A public company having a share capital has to pass through all
the four stages mentioned above before it can commence business or exercise any borrowing powers.
(Sec. 149)
PROMOTION
Before a company can be formed, there must be some persons who intended to form a company
and who take the necessary steps to carry that intention into operation. Such persons are called
promoters. The promotion of a company is a comprehensive terms denoting that process by which a
company is incorporated and floated, or established financially as a joint concern, by the issue of a
prospectus.
The ‘promotion’ is the first stage in the formation of a company. Promotion may be defined as
“the discovery of business opportunities and the subsequent organisation of funds, property and
managerial ability into a business concern for the purpose of making profit there from.”
The Promoter
“A person who originates a scheme for the formation of the company, has the memorandum and
articles prepared, executed and registered and finds the first directors and settles the terms of the
preliminary contracts and prospectus (if any) and making arrangement for advertising and circulating
the prospectus and placing the capital is a promoter.”
A person may be a promoter even if the undertakes a lesser active role in the formation of a
company. Section 62(6) makes it clear that person who acts in a professional capacity is not a promoter,
like an advocate, solicitor and auditor.
Who can be a promoter:- A promoter may be a natural person or a company, firm or association of
persons, whether a person is or is not a promoter depends upon the nature of the role played by him in
the promotion of business.
Functions/Role of a Promoter
1. To originate the scheme for formation of the company: Promoter conceives the idea of
forming a company after a through study of the business world and identify the business fields
which are unexplored or may be explored further.
2. To secure the cooperation of the required number of persons willing to associate
themselves with the project: In fact, the minimum number of members required to join a
private company is two and in case of a public company seven.
3. Nomenclature: The promoters have to verify from Registrar of Companies whether the
proposed name is available. Promoters usually give three names in order of preference.
4. To get the documents of the proposed company prepared: No company can be incorporated
unless the M.O.A. and A.O.A. and other documents are not field with the Registrar. Since the
company takes birth from the date when certificate of incorporation is issued.
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However, the normal ways of rewarding the promoters for their valuable services are as follows:
(i) They may be paid a lump sum either in cash or in the form of shares or debentures of the
company.
(ii) They may be given commission on the purchase price of the business taken over by the
company.
(iii) They may be inducted into the Board of Directors.
(iv) He may be allowed to sell his own property to the company for cash at an inflated price, after he
has made a full disclosure about the valuation and the profit earned to an independent Board of
Directors.
(v) The company may give him an option to subscribe for a certain number of the company’s
unissued shares at par when their market price is higher.
Preliminary Contracts and Pre-incorporation Contracts
The promoters of a company usually enter into contracts to acquire some property or right for the
company which is yet to be incorporated, such contracts are called pre-incorporation or preliminary
contracts.
Provisional Contracts
The provisional contracts are those contracts which are entered by a public company after incorporation
but before the company becomes entitled to commence business.
INCORPORATION OF A COMPANY
“Any seven or more persons or where the company to be formed will be a private company, any two or
more persons, associated for any lawful purpose may, by subscribing their name to a memorandum of
associations and otherwise complying with the requirement of this Act in respect of registration, form
an incorporated company, with or without limited liability.” [Sec. 12]
Disqualifications of subscribers of MOA: The ‘person’ who subscribes to the memorandum of
association of the company should not be an infant, an undischarged insolvent, an alien enemy, a lunatic
and a person disqualified by law from entering into a contract.
Procedure of Incorporation of a Company
Before proceeding to register a company, the promoters have to decide the following aspects:
(a) Type of company: the promoters must decide whether they want to incorporate a private
company or a public company.
(b) Availability of Name: A company is identified by the name with which it is registered.
As per section 13, the memorandum of association of a company should state the name of the
company.
Promoters of a company under a proposed name may make an application to Registrar of Companies in
e-Form No. 1A, accompanied with a fee of Rs. 500.
Corporate Identity Number: Registrar of Companies is to allot a Corporate Identity Number (CIN) to
each company registered on or after Nov. 1, 2000.
(1) This certificate contains the name of the company, the date of its issue, and the signature of the
Registrar with his seal.
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CAPITAL SUBSCRIPTION
After being registered and receiving the Certificate of Incorporation, Company is ready for flotation. It can go
ahead with raising capital from the public to commence its operation satisfactorily.
Since private company is prohibited from inviting public to subscribe, it can raise the necessary capital from
friends and relatives.
Section 70 of the Companies Act requires every public company to take either of the following two steps:
(i) Issue a Prospectus if public is to be invited to subscribe to its share capital, or
(ii) File ‘A Statme In Lieu of Prospectus’, in case capital has been arranged privately.
COMMENCEMENT OF BUSINESS
A private company can commence business immediately after incorporation. However, in the case of
companies other than the private company and a company having no share capital, further requirement is to
be complied with, namely, obtaining ‘a certificate of commencement of businesses before it commence its
business.
No public company can commence any business on exercise any borrowing power unless the
Certificate to Commence Business is obtained.
Penalty: If any public company having share capital commences business or exercises borrowing power
without obtaining the certificate to commerce business, then every person at fault shall be liable to fine
which may extend to Rs. 5,000 for every day of default. (Sec. 149 (b))
It should be noted that the company commences business within one year of its incorporation or otherwise it
is liable to be wound up by the Tribunal. (Sec. 433 (c))
Procedure for the Incorporation of a Private Company: The procedure for the incorporation of a private
company is the same as that of a public limited company with the following charges:
(a) There should be at least two subscribers in place of seven.
(b) e-Form No. 29 (relating to consent of directors) need not be prepared and filed.
(c) Registration of articles of association in compulsory.
MEMORANDUM OF ASSOCIATION
Definition
Memorandum means the memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previous companies law or of this Act.
Palmer,….. It contains the objects for which the company is formed and therefore, identifies the possible scope
of its operations beyond which its actions cannot go. It defines as well as confines the powers of the company.
Significance
1. It determines some basic features of the company being formed, such as its name, registered
office, capital etc.
2. It determines the area of activity for the company.
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3. It lays down the basic parameters to guide the relationship between the company and the
outsiders who deal with the company.
Sec. 13 refers to the contents of the Memorandum
1. Name clause :
Every company has to adopt its corporate name carefully. This name has to be stated in the
Memorandum. The name of the company as approved by the Registrar would need to be given
sufficient display as per the rules, such as outside every office, on the letters, notices etc. In the case of
a limited liability company, the word Limited Private limited must be there as the last words of the
name.
2. Registered office clause :
This clause requires the mention of the state in which the registered office of the company is to be
situate. A company must have a registered office as a stable place for its location and as its
domicile.
3. Object clause :
The memorandum must state the objects for which the company is being formed. This clause defines
the area of activities for which the company is being formed. Any activity outside the limits defined by this
clause would be ultra vires (beyond the powers) for the company and the company can neither do it nor
ratify it if it is done by any agent without its sanction.
4. Liability clause :
The nature of liability of the members of the company being formed must be indicated by the
memorandum. The memorandum of a company limited by shares or by guarantee shall also state
that the liability of its members is limited [Sec. 13(2)]
5. Capital clause :
The capital clause lays down the maximum limit of the capital beyond which the company cannot
issue shares. This amount is described as registered capital or authorized capital or nominal
capital.
6. Subscription or association clause
This clause contains the declaration by the signatories to the Memorandum about their desire to
be formed into a company, about their commitment to acquire the qualification shares, if any, and
the personal details about the subscribers with their signatures attested by a witness.
ALTERATION OF MEMORANDUM
(A) Alteration of name clause
A company may, be special resolution and with the approval of the Central Government signified in
writing change its name : If a company makes default in complying with any direction given by the
government. Shall be punishable with fine which may extend to Rs. 1000 for every day during which the
default continues (Sec. 22).
(B) Alteration of registered office clause
(i) Change of office within the same city. The rule contained in Sec. 146(2) implies that a company
can make a change in the registered office within the local limits of the same city, town or village
through a resolution of the Board of directors. Such a change must be brought to the notice of the
Registrar within 30 days of the change.
(ii) Change from one city to another within the same state. This situation attracts the provisions of
sec. 17A and Sec. 146. Sec. 146(2) lays down that a change in the registered office from one city to
another within the same state would require the passing of a special resolution in the general
meeting of the company and filing its copy with the Registrar within 30 days.
(iii) Change of registered office from one state to another.
The office is shifted to the new state and the address notified to the new Registrar within 30 days of
shifting to the new office.
(C) Alteration of liability clause
A company can alter its objects clause also, but, since it is a very vital clause in the Memorandum.
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(i) Contact are void ab initial. A contract which is ultra vires the company is void ab initial. Under
such a contract, the company cannot sue or be sued upon.
(ii) Personal liability of directors to the company. If the directors of the company utilize funds of the
company in ultra vires transactions, they would be personally liable to compensate the company
for any loss suffered by the company.
(iii) Personal liability of directors to third parties. As the agent of the company, the directors are
expected to act within the authority available to them. If they act outside the scope of this
authority by presenting themselves to the possessing the authority, this will be a breach of
warranty of their authority.
(iv) Property acquired ultra vires. The funds of the company may be spent in acquiring a property
ultra vires. The company’s right over the acquired property shall be secure and intact.
(v) Injection. In case a company has done is about to do an act ultra vires its Memorandum, any
shareholder may seek an order of injunction from the court restraining the company from doing
so.
Where the Doctrine does not Apply under some circumstances as mentioned below:
(i) Where the act is ultra vires only the directors, it may be ratified by the company.
(ii) Where the act is ultra vires only the Articles of Association, the Articles may be altered to make
the action intra vires the articles.
(iii) Where the act is intra vires but has been done in violation of some bye-laws of the company, the
Board or the general meeting may condone it.
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ARTICLES OF ASSOCIATION
The Articles of Association is the second important document to be prepared by the promoter and
then submitted at the time of registration. The Articles contain the rules and regulations and the bye-laws of
the company to govern its internal affairs and functioning.
Form
Regarding the form of the articles Sec. 30 states that the Articles shall be printed, be divided into
paragraphs numbered consecutively, and be signed by each subscriber of the memorandum of association.
Contents
1) Various classes of shares the company shall issue and their rights.
2) Procedure for issue of shares and their allotment.
3) Procedure for issuing share certificates and share warrants.
4) Forfeiture of shares and the procedure for their re-issue.
5) Procedure for transfer and transmission of shares.
6) Calls on shares.
7) Conversion of shares into stock.
8) Payment of commission on shares and debentures to underwriters.
9) Borrowing powers of directors.
10) Rules for adoption for preliminary contracts, if any,
11) Re-organization and consolidation of share capital.
12) Alteration of shares capital.
13) Payment of dividends and creation of reserves.
14) General meetings, proxies and polls.
15) Voting rights of members.
16) Keeping of books of account and their audit.
17) Rules regarding use of the Common Seal of the company.
18) Appointment, powers, duties, qualifications and remuneration of directors.
19) Appointment, powers, duties remuneration, etc of auditors.
20) Appointment, powers, duties, qualifications, remuneration etc of the managing director, manager and
secretary, if any.
21) Lien on shares.
22) Capitalization of profits.
23) Board meeting and their proceedings
24) Rules as t resolutions.
25) Winding up of the company.
ALTERATION OF ARTICLES
According to Sec. 31, the Articles of a company can be altered by a special resolution. A copy of the
special resolution which authorized the alteration of Articles must be sent to the Registrar together with the
copy of the altered Articles within 30 days of passing of the resolution.
Procedure of Alteration
1. Where the form of company remain unchanged: The following procedure is required to be
followed for effective alteration of the articles :
a. Approval of the Board
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b. Special resolution
c. Filing resolution with the Registrar
2. Where a private company is converted in to a public company
1. The Board shall approve the draft resolution
2. Special resolution
3. To get the approval of the Central Government to the alteration.
4. File with the Registrar a printed copy of the altered articles. It shall be filled within one month from date of
receipt of the order of approval.
SHARE
Ordinary Shares (Equity Share)
Equity shares capital means all share capital which is not preference share capital. In other words, a share or
share capital which does not give the definition of preference shares or preference share capital, is equity
share capital.
Equity shareholders receive dividend out of profits as recommended by the Board of directors and as declared
by the shareholders in an annual general meeting but after preference shares have been paid their fixed
dividend.
Moreover, equity shareholders have a right to vote on every resolution placed in the meeting and the voting
right shall be in proportion to the paid up equity capital. Unless a company issue equity shares with
differential rights.
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Preference Shares
Preferences shares with reference to any company limited by shares are those which carry:
(a) A right to be paid a fixed amount of dividend or the amount of dividend, calculated at a fixed rate, e.g.,
10% nominal value of shares and also.
(b) A right to be paid the amount of capital paid up as such shares in the event of winding up of the
company.
The articles share capital is the sum of total of preference shares.
CLASSES OF CAPITAL
In view of the stages involved in collecting the money on shares, the shares capital of a company may be
classified as follow:
(1) Authorised Capital: It is the capital which is stated in company’s memorandum of association with
which the company intends to be registered. It is called the nominal or registered capital. It is the
maximum amount of shares capital which a company is authorised to raise by issuing the shares.
(2) Issue Capital: It is that part of the authorised capital which is actually offered (issued) to the public
for subscription. Therefore, the issued capital can never be more than the authorised capital. It can
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at the most be equal to the nominal capital. The balance of nominal capital remaining to be issued is
called ‘unissued capital’.
(3) Subscribed Capital: It is that part of the issued capital which has been actually subscribed by the
public. In other words, it is that part of issued capital for which the applications have been received
from the public and shares allotted to them.
(4) Called-up Capital: It is that part of nominal value of issued capital which has been called-up or
demanded on the shares by the company. Normally, a company does not collect the full amount of
shares it has allotted.
(5) Paid-up Capital: It is that part of the called-up capital which has actually been received from the
shareholders.
(6) Reserve Capital: It is that part of the uncalled capital which cannot be called by the company except
in the event of its winding up.
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Winding up of a company
Winding up of a company is defined as a process by which the life of a company is brought to an end and its
property administered for the benefit of its members and creditors. An administrator, called the liquidator, is
appointed and he takes control of the company, collects its assets, pays debts and finally distributes any
surplus among the members in accordance with their rights. At the end of winding up, the company will have
no assets or liabilities. When the affairs of a company are completely wound up, the dissolution of the
company takes place. On dissolution, the company's name is struck off the register of the companies and its
legal personality as a corporation comes to an end.
The procedure for winding up differs depending upon whether the company is registered or unregistered. A
company formed by registration under the Companies Act, 1956 is known as a registered company. It also
includes an existing company, which had been formed and registered under any of the earlier Companies
Acts.
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g) Tribunal may inquire into the revival and rehabilitation of sick units. It its revival is unlikely, the
tribunal can order its winding up.
h) If the company has made a default in filing with the Registrar its balance sheet and profit and loss
account or annual return for any five consecutive financial years
i) If the company has acted against the interests of the sovereignty and integrity of India, the security of
the State, friendly relations with foreign States, public order, decency or morality.
B. Voluntary Winding Up of a Registered Company
When a company is wound up by the members or the creditors without the intervention of Tribunal, it is
called as voluntary winding up. It may take place by:-
By passing an ordinary resolution in the general meeting if: -
(i) the period fixed for the duration of the company by the articles has expired; or
(ii) Some event on the happening of which company is to be dissolved, has happened.
By passing a special resolution to wind up voluntarily for any reason whatsoever.
Within 14 days of passing the resolution, whether ordinary or special, it must be advertised in the Official
Gazette and also in some important newspaper circulating in the district of the registered office of the
company.
The Act provides two methods for voluntary winding up:-
1. Members' voluntary winding up
2. Creditor's voluntary winding up
b) Shareholders must pass an ordinary or special resolution for winding up of the company.
The provisions applicable to members' voluntary winding up are as follows:-
a) Appointment of liquidator and fixation of his remuneration by the General Meeting.
b) Cessation of Board's power on appointment of liquidator except so far as may have been sanctioned
by the General Meeting, or the liquidator.
c) Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator by the
general meeting subject to an arrangement with the creditors.
d) Sending the notice of appointment of liquidator to the Registrar.
e) Power of liquidator to accept shares or like interest as a consideration for the sale of business of the
company provided special resolution has been passed to this effect.
f) Duty of liquidator to call creditors' meeting in case of insolvency of the company and place a
statement of assets and liabilities before them.
g) Liquidator's duty to convene a General Meeting at the end of each year.
h) Liquidator's duty to make an account of winding up and lay the same before the final meeting.
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The Board of Directors shall convene a meeting of creditors on the same day or the next day after the
meeting at which winding up resolution is to be proposed.
A statement of position of the company and a list of creditors along with list of their claims shall be
placed before the meeting of creditors.
A copy of resolution passed at creditors' meeting shall be filed with Registrar within 30 days of its
passing.
It shall be done at respective meetings of members and creditors. In case of difference, the nominee
of creditors shall be the liquidator.
A five-member Committee of Inspection is appointed by creditors to supervise the work of liquidator.
Fixation of remuneration of liquidator by creditors or committee of inspection.
Cessation of board's powers on appointment of liquidator.
As soon as the affairs of the company are wound up, the liquidator shall call a final meeting of the company
as well as that of the creditors through an advertisement in local newspapers as well as in the Official Gazette
at least one month before the meeting and place the accounts before it. Within one week of meeting,
liquidator shall send to Registrar a copy of accounts and a return of resolutions.
However, a foreign company carrying on business in India can be wound up as an unregistered company
even if it has been dissolved or has ceased to exist under the laws of the country of its incorporation.
The provisions relating to winding up of a unregistered company:-
Such a company can be wound up by the Tribunal but never voluntarily.
Circumstances in which unregistered company may be wound up are as follows:-
If the company has been dissolved or has ceased to carry on business or is carrying on
business only for the purpose of winding up its affairs.
If the company is unable to pay its debts.
If the Tribunal regards it as just and equitable to wind up the company.
Contributory means a person who is liable to contribute to the assets of a company in the event of its
being wound up. Every person shall be considered a contributory if he is liable to pay any of the
following amounts:-
Any debt or liability of the company;
Any sum for adjustment of rights of members among themselves;
Any cost, charges and expenses of winding up;
On the making of winding up order, any legal proceeding can be filed only with the leave of the
Tribunal.
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UNIT-VI
Limited Liability Partnership Act, 2008
(LLP Act)
Introduction
With the growth of Indian economy, the role played by its entrepreneurs as well as its technical and
professional manpower has been acknowledged internationally. In this background, a need was felt for a new
corporate form that would provide an alternative to the traditional partnership which exposes its partners to
unlimited personal liability and a statute based governance structure of limited liability companies.
Need –
At present, under partnership law, the maximum numbers of partners a partnership firm can have is twenty
also the partners are liable jointly and severally and most importantly their liability is unlimited which means
that the personal property of the partners can also be attached for the satisfaction of the debts, in addition to
the capital contributed by the partners in the firm.
This is the principal reason why partnerships firms of professionals have not grown in size to meet the
challenges posed today. Not only are the firm’s assets completely liquidated under the standard principles of
the partnership law, but the partners are also jointly and severally liable for the entire liabilities of the
partnership. Thus, the present system acts as a deterrent for the growth and expansion of service based
organizations.
The salient features of the Limited Liability Partnership Act, 2008,are as follows:-
(i) the LLP shall be a body corporate and a legal entity separate from its partners;
(ii) the mutual rights and duties of the partners of the LLP inter se and those of the LLP and its partners shall
be governed by an agreement between the partners inter se or between the LLP and the partners subject to
the provisions of the Act. The Act provides flexibility to devise the agreement as per their choice. In the
absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the Act;
(iii) the LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners
being limited to their agreed contribution in the LLP. No partner would be liable on account of the
independent or unauthorised actions of other partners or their misconduct. The liabilities of the LLP and its
partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be
unlimited for all or any of the debts or other liabilities of the LLP;
(iv) every LLP shall have at least two partners and shall also have at least two individuals as Designated
Partners, of whom at least one shall be resident in India.
(v) the LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of
affairs. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year. The
accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by
the Central Government;
(vi) the Central Government shall have powers to investigate the affairs of a LLP, if required, by appointment
of competent inspector, for the purpose;
(vii) the compromise or arrangement including merger and amalgamation of LLPs shall be in accordance
with the provisions of the act;
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(viii) a firm, private company or an unlisted public company would be allowed to be converted into a LLP in
accordance with the provisions of the act.
(ix) the winding up of the LLP may be either voluntary or by the Tribunal to be established under the
Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High
Court;
(x) the act confers powers on the Central Government to apply provisions of the Companies Act, 1956 as
appropriate, by notification with such changes or modifications as deemed necessary. However, such
notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be
subject to any modification as may be approved by both Houses;
(xi) the Indian Partnership Act, 1932 shall not be applicable to LLPs.
KEY DEFINITIONS:-
"Body Corporate" is defined to mean a company as defined under the Companies Act, 1956 and includes LLP,
LLP incorporated outside India, a foreign company but does not include a corporation sole, a registered co-
operative society and any other body corporate notified by the Central Government (not being a company
defined under the Companies Act, 1956 or LLP defined under LLP Act). [Section 2(1)(d)]
"Business" includes every trade, profession, service and occupation. [Section 2(1)(e)]
"Financial Year", in relation to LLP, means the period from 1st April of a year to the 31st March of the
following year. However, in case of LLP incorporated after 30th September, financial year may end on 31st
March of the year next following that year. [Section 2(1)(l)]
"Foreign Limited Liability Partnership" means a LLP formed, incorporated or registered outside India
which establishes a place of business within India. [Section 2(1)(m)]
"Limited Liability Partnership" means a partnership formed and registered under LLP Act. [Section
2(1)(n)]
"Limited liability partnership” agreement" means any written agreement between the partners of LLP or
between the LLP and its partners which determines the mutual rights and duties of the partners and their
rights and duties in relation to that LLP. [Section 2(1)(o)]
"Partner" in relation to LLP means a person who becomes a partner in a LLP in accordance with the LLP
agreement. [Section 2(1)(q)]
NATURE OF LLP:-
• LLP is a –
— "body corporate" formed and incorporated under LLP Act;
— Legal entity separate from its partners and has perpetual succession.[Sec. 3(1)]
• Two or more partners are required to form an LLP. Any individual or a body corporate can be a partner in a
LLP.
In case if individual is a partner, he should not be –
— found to be of unsound mind; or
— an undischarged insolvent; or
— a person who has applied to be adjudicated as insolvent and the application is pending
[Sections 5 and 6]
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B.B.A. 4th Sem. Subject- Indian Legal System for Business
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B.B.A. 4th Sem. Subject- Indian Legal System for Business
Creditor, which extends credit or acts in reliance on an obligation described in the LLP agreement, without
the notice of any compromise made between the partners, may enforce the original obligation against such
partner.
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B.B.A. 4th Sem. Subject- Indian Legal System for Business
Partners jointly and severally liable. Partners not liable for act of other partners.
Partnership firms are neither body corporate nor do LLP is a body corporate having perpetual
they have perpetual succession and legal entity. succession and legal entity.
Partnership cannot have more than 20 partners. LLP can have more than 20 partners.
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B.B.A. 4th Sem. Subject- Indian Legal System for Business
COMPANY LLP
Capital structure relatively less flexible than LLP. Flexible capital structure.
MISCELLANEOUS PROVISIONS
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B.B.A. 4th Sem. Subject- Indian Legal System for Business
The Central government has been empowered to apply any of the provisions of the Companies Act, 1956 to
LLPs with suitable changes or modification. [Section 67]
ROC may strike off the name of LLP from the register of LLP if LLP is not carrying on business or its
operation, in accordance with the provisions of LLP Act in the manner prescribed. [Section 75]
Forms/documents required to be filed under the LLP shall be filed in electronic form online on the LLP portal
duly authenticated by the partner/designated partner with a digital signature and further attested by the
practicing chartered accountant/company secretary/cost accountant whenever required. [Section 68]
Presently all the provisions of the LLP Act, other than those relating to winding-up and dissolution of LLP and
appellate provisions to be exercised by NCLT and National Company Law Appellate Tribunal [NCLAT], have
been brought into force.
Till the constitution of NCLT and NCLAT under the Companies Act, 1956, the powers of NCLT and NCLAT will
be exercised by the Company Law Board or High Court as is specified in the LLP Act. [Section 81]
Unless specifically provided, the provisions of the Indian Partnership Act, 1932 are not applicable to LLPs.
[Section 4]
Merits of LLP
1) Renowned and accepted form of business worldwide in comparison to Company.
2) Easy to form or easy to establish and low cost of formation.
3) Body Corporate (Separate Legal Entity)
4) Limited Liability
5) Perpetual Succession
6) Flexible to manage i.e. easy to manage and run.
7) Easy transferable ownership
8) Capacity to sue
9) Lesser compliances
10) No requirement of any minimum capital contribution.
11) No restrictions as to maximum number of partners.
12) LLP & its partners are distinct from each other.
13) Partners are not liable for Act of partners.
14) Less Compliance level.
15) No exposure to personal assets of the partners except in case of fraud.
16) Less requirement as to maintenance of statutory records.
17) Less Government Intervention.
18) Easy to dissolve or wind-up.
19) Professionals can form Multi-disciplinary Professional LLP, which was not allowed earlier.
20) Audit requirement only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs. 40
lakh.
Demerits of LLP
1) Any act of the partner without the other partner, may bind the LLP
2) Under some cases, liability may extend to personal assets of partners.
3) Cannot raise money from Public.
Conclusion
The LLP will act as an engine of growth for economic development of the country and would lead to the
growth of professional services in the country. With the liberalisation and globalisation of Indian economy,
the LLP, as an alternate mode of carrying business, will encourage joint ventures and would make Indian
service sectors globally competitive. LLP structure will enable Small & Medium Enterprises and family
partnerships to expand as they will be able to admit outsiders with capital or skill as partners. The hybrid
structure of LLP will facilitate entrepreneurs, service providers and professionals to organize and operate in
an innovative and efficient manner for effectively competing in the global market.
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